A 12-year capital lease specifies equal minimum annual lease payments. Part of this payment represents interest and part represents a reduction in the net lease liability. Additionally, the asset is depreciated on the straight-line basis. The total combined depreciation and interest expense will:

Select one:

a.Be the same each year

b.Fluctuate each year depending on market interest rates

c.Decrease each year

d.Increase each year

Lease X contains no bargain purchase option, but the lease term is equal to 70% of the estimated economic life of the leased property. Lease Y transfers ownership of the property to the lessee at the end of the lease term, but the present value of the lease payments is equal to 75% of the fair value of the leased property. How should the lessee classify Lease X and Lease Y, respectively?

Select one:

a.Operating Lease, Capital Lease

b.Operating Lease, Operating Lease

c.Capital Lease, Capital Lease

d.Capital Lease, Operating Lease